Sir Stelios Haji-Ioannou: flying into a storm

In his latest attack on the company he founded, Sir Stelios Haji-Ioannou has
taken aim at executive pay at easyJet.

Despite speaking for 37.4pc of the equity in the company he founded, Sir Stelios Haji-Ioannou will stay away from the airline's investor day on January 31. His lack of presence, however, will not stop his views from being discussed by other investors.

When Carolyn McCall stands up in front of easyJet's group of institutional investors a week on Tuesday she will do so sound in the knowledge that one will be noticeable by his absence.

As the low cost airline's chief executive reflects on the company's strategy, focuses on operational efficiency and gives an update on how her attempts to woo greater numbers of business travellers are going, McCall will be conscious that the one shareholder she might like to hear her presentation will not be in the room.

Despite speaking for 37.4pc of the equity in the company he founded, Sir Stelios Haji-Ioannou will stay away from the airline's investor day on January 31. His lack of presence, however, will not stop his views from being discussed by other investors.

After a brief hiatus at the turn of the year, Sir Stelios has, in the past few days, once again stepped up his campaign against the company's board, this time choosing to attack the way it remunerates its senior management team, including McCall.

After aiming his sights in the recent past on the company's capital expenditure plan, the amount of cash it holds on its balance sheet and the speed of its growth, Sir Stelios is now joining the debate on executive pay, and asking the question: how much is too much?

With the company's first quarter trading statement –due to be published on Thursday – likely to be warmly received, and its shares, which closed at 422.5p on Friday night, trading at levels not seen in a year, do the "noises off" from the company's founder matter as much as they once did?

The man himself would argue that not only does his view matter more than ever, but also that he is projecting his concerns on behalf of not only his shareholding – which he shares with his brother and sister – but also the company's 3,000 or so small shareholders and the millions more who hold easyJet shares through pension plans.

In a series of spirited email exchanges with The Sunday Telegraph, he alleged what he believes to be "creative accounting" at the company. He says it has resulted in a long-term incentive plan (LTIP) share award worth nearly £7m being handed to 10 senior managers, led by McCall, whose individual award is valued at £1.8m based on current prices.

In a 20-page presentation circulated to institutional investors in the past week, Sir Stelios questions the basis upon which the company remunerates its senior staff, dismissing the way in which it calculates return on capital employed (ROCE), the metric used in its LTIP scheme.

The company's results for the year to September 30 show ROCE improved by 3.9 percentage points in the year, to 12.7pc.

Sir Stelios rejects this, saying of the definition of ROCE set by the board, chaired by former KPMG International chairman Sir Michael Rake: "Their calculation is simply phoney and self serving.

"The Mike Rake definition of ROCE is not a 'widely accepted' one. It is the only one that makes capital employed a lower sum than equity so they can get more cash, easier and for mediocre performance.

"The true return on capital employed is circa 4pc," Sir Stelios said, adding that the company's definition of ROCE "uses all the fixed assets of the company to offset all the debt so they cancel each other out. This encourages excessive leverage and risk-taking. This is dangerous for shareholders."

Such language echoes a letter which Sir Stelios sent to David Cameron, the Prime Minister, on Thursday last week, which focused on the need for reform of executive remuneration, and called the mechanisms by which board room pay is set as being "rotten".

Despite his clear concerns about the company's board – as we reveal today, he plans to vote against the board's remuneration report at the company's annual general meeting on February 23 – he has consistently refused to meet Sir Michael over the past three months. This is in spite of what are understood to be a series of "olive branch" offers.

"I refuse to meet with him because he is playing dirty to protect their own pockets," Sir Stelios said this weekend. "I will only meet with them if they admit that capital employed equals equity plus debt."

Whether that mantra is one which other shareholders agree with remains to be seen. Sir Stelios suggests other investors are shy about speaking out for fear of allegations of operating in a concert party by the Takeover Panel, and possibly triggering an offer for the entire company.

It is clear that the overarching focus on executive pay is one that, in general terms, concerns a number of large blue-chip shareholders, including the likes of Schroders, which owns a 5.5pc stake in easyJet. But whether that view pertains to easyJet's own remuneration remains unclear.

According to Andrew Lobbenberg, analyst at Royal Bank of Scotland, easyJet's own broker, the various issues have not been without distraction.

"It does serve as a partial distraction to the board and the management team. It's something that investors are alive to," said Lobbenberg. "But it's slightly circular, in that the people who are invested in easyJet do so because they believe in the equity story."

For Sir Michael, it is clear the whole situation is becoming increasingly trying. He describes Sir Stelios's arguments as "inaccurate, inappropriate and misleading".

"His attack on easyJet is at odds with the clear success of Britain's biggest airline," Sir Michael said, noting that 2011 was a record year for the airline. He said that the airline had achieved great success since the arrival of McCall and the finance director Chris Kennedy in July 2010.

Sir Michael goes so far as to turn the tables on Sir Stelios, noting that it was he who wanted to move to ROCE as a measure for performance in the first place.

"EasyJet uses a widely accepted definition of ROCE," he said, adding that "the 12pc target over a five-year period is challenging".

The company points out that on its ROCE measure, IAG, which owns British Airways and Iberia, is currently achieving just 5.6pc.

Sir Michael added: "The £7m share award which Sir Stelios refers to is the total value of a performance-based award which will vest in 2015 and would require easyJet to achieve an average of 13pc ROCE over the next three years in what is set to be a tough market."

The prolonged spat can be traced back to last year's annual general meeting, and Sir Stelios's "no vote" against a series of payments made to Andy Harrison, the outgoing chief executive, designed to retain his services until McCall could start work.

But it really ramped up in the spring of last year, focusing on a number of issues – including attempts to remove certain non-executive directors – and intensified after easyJet disclosed, without Sir Stelios's permission, his early stage plans to launch a rival airline, Fastjet, last October.

It is clear that relations between the two sides havehit a new low. Communication between the two is now being conducted almost solely via email, with all efforts by Sir Michael to set up a face-to-face meeting dismissed in recent months.

For other shareholders, stuck in the middle, the onslaught against the company's governance standards threatens to overshadow its financial performance.

First-quarter trading numbers due on Thursday are expected to be positive. Peter Hyde, of Liberum Capital, is forecasting revenue for the three months to the end of December of £748m – against £654m in the same period in the previous year.

One analyst, who asked not to be named, noted that as the management continues to perform, Sir Stelios's demands should become less of a concern, "with the Stelios discount [to share price] diminishing over time".

The analyst continued: "Every so often he's going to write a letter which isn't particularly helpful, but the real issue for shareholders would be if the board started to do everything he wanted, which doesn't seem likely."

For Gert Zonneveld, analyst at Panmure Gordon, the real issue is not the concerns Sir Stelios airs – he said it is right that a major shareholder should flag doubts over strategy – but more the way he does it.

"To have this public spat carried out for the media is not constructive. It is all quite confrontational." That said, Zonneveld does not believe the impact will be long-lasting, arguing the more concerns are raised, the less investors will listen.

"It's getting to the stage where we're almost getting used to it. He's getting quite predictable."

If that is the case and Sir Stelios is a lone voice in easyJet's tail winds, Sir Michael and the rest of the board should have a fairly relaxed AGM. But it is clear from the billionaire's lexicon that he is not finished yet.

Sir Stelios said: "I am not attacking easyJet, I am attacking the Mike Rake regime and other fat cats of the City."